Economcis of the Forex Majors

The Economic Surprise Index

These charts show the performance of the major forex economies they show the difference between actual data and forecast results as well as actual data and previous data. It provides a visual representation of how a country is doing and as a result gives a view of how that countries central bank is likely to be feeling. A full methodology of the surprise index is available. For analysis it is better to look at currencies in groups so we have The safe Havens (USD, JPY), Europe (EUR,GBP) and the Commodities (AUD,NZD,CAD). I dont look at the CHF as it releases very little data and its central bank trys to track the euro.

The Safe Havens

The United States

After a great first quarter the US economy has underperformed dramatically, this explains the fortunes of the US dollar of late and suggests that the outlook remains very muted. The FED cannot be feeling as rosy as they did at the turn of the year with the economy missing targets and slowing to such a degree.

Japan

The chart is not as smooth because Japan do not release as much data, however the trend is what matters. The performance of Japan is almost the reverse of the US with the surprise index going negative in the first quarter and seeming to have developed an upward trajectory since March. This is likely to have less impact on the YEN because the Japanese government and central bank is committed to easing in the hope of adding traction to the economy. The improving economy will likely give them confidence that measures are working making them less likely to change course.

The European Currencies

The Eurozone

The eurozone economy is on fire, a constant improvement beating expectations and improving on previous numbers. The improvement is pretty much universal with all member countries doing well. The result has been clear as the ECB start to openly discuss the end of stimulus and the normalisation of monetary policy. The Euro may have a long way to go this year and the trajectory looks clear

The UK

The UK has found it difficult to keep up with its European neighbor, the pace of improvement was slower at the start of the year and has taken a noticeable turn for the worse. I have written a couple of blog posts about the outlook for the Uk and it is really bleak. A significant recession is starting to look unavoidable, real incomes are falling as prices surge and wages stagnate. More and more companies announce plans to move to Europe post Brexit and the country faces its most challenging period with a hung parliament and possibly the worst prime minister in living memory. I will only be trading the GBP in one direction.

The Commodity Currencies

Canada

Canada raised rates this month following a significant improvement in its economic data, the country had a poor set of data in April/May but all the other months this year have been very positive, with the outlook for commodities improving and global trade generally seeming to be quite strong expect the resource rich Canada to continue to perform and its currency to follow that economic performance.

Australia

The markets were surprised this month when the RBA maintained its dovish stance and when you look at this chart you can see why. The Australian economy is doing really well, this kind of growth will force the RBA to fall in line with the ECB and BoC and recognise that strong growth requires a more hawkish stance. If the data continues in this way the RBA will change their language and start to warn the markets about rate rises, the AUD will climb significantly as a result

New Zealand

The New Zealand economy has underpeformed relative to Australia in recent months (AUDNZD long) the NZ economy is more dependent on soft commodities than AUS and CAD, these softer commodities have lagged behind the recovery in metals. We will have to watch closely to see if the economy is going to accelerate towards its neighbor or continue to lag.

Conclusions

The European economy looks very strong, EUR likely to increase

The US economy has slowed USD under pressure

Australian economy doing well AUD supported

The outlook for the UK and Newzealand is less clear.

All countries doing relatively well which means a risk on environment. Yen under pressure

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